The Federal Board of Revenue (FBR) has proposed a one percent increase in all withholding tax rates effective October 1, contingent on continued revenue shortfalls in September 2024.

Sources indicated that this proposal has been drafted at the FBR level to increase withholding tax rates if the agency fails to meet its tax collection targets during the final month of the first quarter from July to September for the fiscal year 2024-25, Business Recorder reported.

If the FBR does not achieve its September target, the proposal would be enacted through a supplementary Finance Bill. The outcome now hinges on tax collectors meeting their targets for September, or else a further increase in withholding tax rates may occur in October.

During the 2023-24 fiscal year, withholding taxes (collected in sales tax mode) accounted for over 70% of total direct tax revenue.

While the standard sales tax rate may remain unchanged, there is a proposal to increase withholding tax rates by 1% if revenue shortfalls persist, according to sources.

The FBR has experienced a significant shortfall of Rs 98 billion in tax collection during the first two months of 2024-25, with net collections reaching Rs 1,456 billion against a target of Rs 1,554 billion.

Sources indicated that the FBR is likely to face a shortfall of nearly Rs 100 billion in September, attributed to a decline in import taxes and other factors. The momentum in imports has not been sustained due to ongoing reductions in import levels. Additionally, the anticipated autonomous growth of 18% in domestic taxes may be adjusted down to 11% in the coming months.

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Sources indicated that, given the situation at the time, criticizing senior tax officials and threatening suspensions or transfers did not effectively boost tax collection in September.

An urgent strategy was deemed necessary for digitization to enhance tax collection by effectively monitoring withholding taxes through the “SWAPS” system and addressing illegal or inadmissible sales tax adjustments exceeding Rs 1 trillion through data analysis and verification by PRAL.